Editorials

The Irish Times view on forecasts of falling inflation

Predictions of easing prices pressures are welcome, but it is too early to sound the all clear

Finance Minister Michael McGrath has forecast that the rate of inflation will average four to five per cent this year, well below previous forecasts : (Photo:PA)
Finance Minister Michael McGrath has forecast that the rate of inflation will average four to five per cent this year, well below previous forecasts : (Photo:PA)
Sun Feb 26 2023 - 20:50

The news that the official forecast for inflation this year has fallen to 4-5 per cent, from around 7 per cent previously, is welcome and reflects a sharper than expected fall in wholesale energy prices. Minister for Finance, Michael McGrath said that inflation “has now peaked and is falling back.”The forecast implies that price pressures will have eased even further by the end of this year, while improve the outlook for 2024.

Much depends on wholesale gas and oil markets, of course. The fall in prices from the high levels reached last summer has been dramatic, but while wholesale gas prices are now back to pre-war levels, they remain well above levels seen up to 2020. At current levels, indications are that this might lead to some fall in household bills in the months ahead, but they could remain well above levels we became used to for many years. The need to direct more national – and household – income to buying energy is likely to remain for some time.

Nor is the trend in inflation easy to predict. Internationally, financial markets were lifted early this year by forecasts of a rapid drop in price pressures. Now, following a series of more upbeat economic indicators, particularly in the US, investors are thinking again. Stronger growth is good news in that it is positive for jobs and incomes, but it could also make it more difficult for central banks to shake inflationary pressures out of the economy.

A slower fall in international inflation could also knock on to Ireland. Barring a reversal in energy prices, the really high inflation rates we saw last year should be behind us. But there is a risk here, as elsewhere, that inflation could remain “stuck” at a level significantly above the ECB’s two per cent target.

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So while the outlook is better than expected, it is too early to sound the all clear. And a key factor is that even if the rate of inflation falls, the actual level of prices will remain high and it will take household income some considerable time to adjust. The cost-of- living crisis has a way to run yet.